Delivering Global Macro Investment Insights

DeSaque Macro Research

DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the view to delivering global macro investment insights aimed at providing new ideas to clients.

Said DeSaque has over 26 years of experience working as a professional economist in financial services. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist at Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he eventually became Head of the London Economics Department.

Said takes a very keen interest in international relations, along with their implications for economic development. His research interests include the economic transformation of China and its implications for global capital markets, particularly in the United States. He is a member of Chatham House in London.

The US economy and capital markets have historically been Said’s main focus of attention. He frequently presents his views to institutional investors in diverse geographic locations. In recent years, Said has also been carefully monitoring economic developments in Asia, particularly China and Japan.

Trade War/Hong Kong/Economy/Industrial Policy/Coal

Trade Goblet Half Full in the US and Half Empty in China

Global Economist, DeSaque Macro Research

Said Desaque

Global Economist

Macroeconomics

<p>After placating the intense fears that US equity investors held twelve months ago via a dovish policy tilt in January, Fed Chair Powell last week presented an economic outlook supporting continued policy accommodation that should be bullish for US equities. Low unemployment is not viewed as threatening to the inflation outlook, thereby reducing the risks of a recession-inducing resumption of policy tightening to cool the economy.</p>
<div>Future movements in the federal funds rate could be influenced by Federal Open Market Committee (FOMC) members' estimate of the neutral policy level that has receded in recent years. Research by a Fed staff economist indicates that the real neutral federal funds rate level is negative, thereby helping to explain the persistent undershooting of inflation during recent times and financial market turbulence in 2018 Q4 as policy became increasingly and prematurely restrictive.</div>
<div></div>
<div>The persistent lowering of the neutral federal funds rate estimate by FOMC members would suggest that US interest rate levels are no longer deemed to be mean-reverting. Lower real equilibrium Fed policy rate levels will be supportive for the riskier segments of the capital structure that could produce excessive risk-taking and elevated valuation levels. </div>
<div></div>
<div>
<div>The growth of off-shore dollar funding markets, due to chronic US current account deficits, has significantly increased the influence of Fed policy changes in emerging markets. Lower real equilibrium US monetary policy rates could bolster capital inflows into emerging markets, thereby creating local asset bubbles as well as potentially encouraging excessive debt-funded investment.</div>
</div>
<div></div>
<div>The lower potential GDP growth of advanced economies that has produced lower equilibrium monetary policy interest rates should encourage China to become less-reliant on external demand for economic growth and more independent from changes in Fed policy. If China seriously begins addressing the rebalancing of its economy, then the influence of US monetary conditions in the setting of local currency interest rates will become significantly diminished.</div>
<div>
<p></p>
</div>

After placating the intense fears that US equity investors held twelve months ago via a dovish policy tilt in January, Fed Chair Powell last week presented an economic outlook supporting continued policy accommodation that should be bullish for US equities. Low unemployment is not viewed as threatening to the inflation outlook, thereby reducing the risks of a recession-inducing resumption of policy tightening to cool the economy.
Future movements in the federal funds rate could be influenced by Federal Open Market Committee (FOMC) members' estimate of the neutral policy level that has receded in recent years. Research by a Fed staff economist indicates that the real neutral federal funds rate level is negative, thereby helping to explain the persistent undershooting of inflation during recent times and financial market turbulence in 2018 Q4 as policy became increasingly and prematurely restrictive.

The persistent lowering of the neutral federal funds rate estimate by FOMC members would suggest that US interest rate levels are no longer deemed to be mean-reverting. Lower real equilibrium Fed policy rate levels will be supportive for the riskier segments of the capital structure that could produce excessive risk-taking and elevated valuation levels. 


The growth of off-shore dollar funding markets, due to chronic US current account deficits, has significantly increased the influence of Fed policy changes in emerging markets. Lower real equilibrium US monetary policy rates could bolster capital inflows into emerging markets, thereby creating local asset bubbles as well as potentially encouraging excessive debt-funded investment.


The lower potential GDP growth of advanced economies that has produced lower equilibrium monetary policy interest rates should encourage China to become less-reliant on external demand for economic growth and more independent from changes in Fed policy. If China seriously begins addressing the rebalancing of its economy, then the influence of US monetary conditions in the setting of local currency interest rates will become significantly diminished.




Implications of a Lower Real Equilibrium Federal Funds Rate: China's Response Could Be Nuanced